Hey everyone, Alex Hernandez here with Academy Mortgage here in Sunny St. George Utah. Something that I see everyday when helping people just like you buying a new home is they have an idea of what their monthly mortgage payment budget is going to be, but they have no clue what their mortgage payment consists of.
Most clients are use to what you see with an auto loan. They go into the bank. Borrow X amount of money and based on their financial health they have the option for how long they would like the pay back period to be. They are charged a certain interest rate and BOOM their payment is set up. The principal of each payment goes to the balance of what they owe and the interest each payment goes to the lender, which is how they make money for giving you money to borrow.
Seems simple, but mortgage loans have a few more things we have to consider.
First, just like an auto loan. With a mortgage payment you will have the principal portion paid to the balance of the loan. As the balance goes down the less and less you owe that lender and the more equity you build.
The second component of your monthly mortgage payment is the interest portion. The interest is figured by the percentage rate you qualified for, or agreed to pay when you got your loan. This portion of your monthly mortgage payment will go to the lender that is servicing your loan. The lender is paid interest because they gave you the money to go buy the home.
The third part of your monthly mortgage payment is your Real Estate Taxes. This portion of you payment is actually sent to an escrow account where it sits until it is time to pay your taxes in November. The great thing about an Escrow account is you don’t have a big tax bill at the end of the year and are not having to scramble to find a way to pay your property taxes. Your property taxes go to the local government and that money is used to upkeep roads, public parks, and more.
The fourth part of your monthly mortgage payment is your Hazard insurance - or also known as your homeowners insurance. Your homeowners insurance is required as long as you have a loan on your home. Just like your auto insurance, when you have a loan on it you must also carry enough insurance to cover the worth of the vehicle in the chances you wreck your car.
The fifth part of your payment is mortgage insurance. You will be required to carry mortgage insurance on your home if you put less than 20% of the purchase price when you buy the home. Some loan programs make you carry it for the life of the loan, but conventional loans the mortgage insurance wil come off automatically at 78% Loan to value or you can purchase an appraisal and as long as you are under 80% LTV Mortgage insurance will come off of your monthly payment. Mortgage insurance in insurance for the lender and protects the lender if you were to default on your loan. That is why lenders require you to have it.
The final piece of your mortage payment is an HOA. Home owners associations are only required in certain neighborhoods so when looking for a home keep the HOA dues in mind and make sure that HOA is not busting your budget. HOAs can cover things like exterior building insurance, exterior water for common area landscaping, it will help maintain the neighborhood parks or pools as well.
Boom there it is. Now you have a good understanding of how your mortage payment is broken down and you are ready to start planning for your next home. If you have any questions please reach out anytime and in the meantime follow me on Instagram at /alexh.mortgage and on Facebook at /alexh.mortgage.
Have any specific questions? Ask away!